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Could SoulCycle Be the Next Under Armour Inc.?

The boutique fitness chain could inspire investors when it hits the public markets later this year.

Fitness stocks have been among the strongest bets on the market over the last ten years, as the so-called "athleisure" trend has taken scrappy start-ups like lululemon athletica and Under Armour to multibillion-dollar valuations. Even veteran Nike has ridden the trend to market-crushing returns as the chart below shows.

More recently, wearable technology has made hot commodities out of fitness trackers such as Nike's Fuelband and Fitbit, which IPO'ed earlier this year and has already gained 150% in less than two months on the public markets, carrying a $10 billion valuation to boot.

Now SoulCycle is getting ready to splash into the market. The chic spinning studio chain announced plans to file for an IPO last week. Here are a few basics about the company:

Founded in 2006 by Elizabeth Cutler and Julie Rice, SoulCycle defines itself as "a rapidly growing lifestyle brand that strives to empower our riders in an immersive fitness experience." Like the fitness brands above, especially Lululemon, and other lifestyle brands such as Whole Foods, SoulCycle identifies with the "global trend toward healthy living and a lifelong quest for meaning, wellness and personal growth."

The front desk of a SoulCycle studio. Source: SoulCycle.

From its start in a single Manhattan studio in 2006, the business has grown to 38 studios in several markets nationwide, most heavily concentrated in New York and Los Angeles, and has served 300,000 unique riders.

This ain't no tech IPOUnlike many recent IPOs, especially those that have come out of the social media realm, SoulCycle is overwhelmingly profitable. Its studios, which average 2,000 to 5,500 square feet, generate an average of $4 million each and a contribution margin of 53%. In 2014, the company tallied revenue of $112 million and net income of $25.3 million. In its most recent quarter, revenue grew by more than 50% with profits increasing by a similar percentage.

It's hard not to be impressed with margins and growth like that, but the biggest question facing SoulCycle and potential investors as it goes public is how big the company can get.

SoulCycle is a high-end brand with classes starting out at $34. It's not surprising that the company has found success in upscale coastal enclaves like Marin county and the Hamptons, but its price points may be tested as it expands to more markets across the country.

In its prospectus, it said it sees ample white space for expansion and expects over the long term to grow the footprint to at least 250 studios. Over the next several years, SoulCycle plans to open 10 to 15 studios a year, and it sees further opportunity abroad, a market it could tap at some point in the future.

With 250 potential studios delivering $4 million in revenue apiece, SoulCycle would hit $1 billion in sales and reach net income in the range of $200 million, extrapolating from its current margins. Additional income streams like apparel sales, online classes, and international sales would be accretive to those totals.

Not quite Under Armour but...Though SoulCycle has the growth rate and the profit margins to match other fitness brand sensations like Under Armour, Lululemon, and Fitbit, there's a key difference. SoulCycle isn't in the business of selling consumer products so the ceiling is likely much lower than it is in the apparel or wearable tech business. The market for global sports and fitness gear is worth over $100 billion, meaning a company like Under Armour with just $3 billion in sales has a long path of potential growth ahead of it. SoulCycle, meanwhile, competes in the much larger fitness industry, but the high-end, specialized niche it's targeting is a much smaller component.

Perhaps a better comparison for SoulCycle would be Shake Shack.

Like SoulCycle, Shake Shack hails from NYC and has carved out a boutique niche and outsized brand name in the much larger fast-food industry. But while McDonald's has 14,000 locations nationwide today, Shake Shack envisions growing from about 63 stores today to only 450.

If Shake Shack's experience on the market since debuting six months ago foreshadows SoulCycle's, that would be a promising sign. While the burger chain's shares have been highly volatile, the stock has more than tripled since its January IPO.

SoulCycle is actually more profitable than Shake Shack, both on a per-unit and overall basis, and may turn out to be the better investment due to its stronger unit economics. It's too early to discuss valuation as pricing was not included in SoulCycle's filing, but if the initial market cap is less than $2 billion, I'd consider taking a ride.

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